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By Francesco Canepa
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FRANKFURT (Reuters) – An expected wave of credit rating cuts for companies as a result of the coronavirus crisis has yet to materialise, data shows, meaning speculation that the European Central Bank will buy bonds of “fallen angels” downgraded to junk may be premature.
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The ECB has warned there is “considerable risk of imminent downgrades” for euro zone corporate bonds, many of which could be pushed into the speculative grade or “junk” category.
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That would force large investors such as insurance and pension funds, which are largely restricted to investment-grade assets, to sell any bonds they hold, hitting prices and hampering companies\\\’ ability to refinance debt.
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Sources have told Reuters ECB staff are considering whether to add recently downgraded bonds to its 1.35 trillion euro ($1.52 trillion) emergency stimulus programme, as the Federal Reserve has done to help support the U.S. economy.
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But Refinitiv data compiled by Reuters shows only three companies that qualify for ECB purchases have lost their investment-grade status since April 7 — French auto-maker Renault
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The ECB currently accepts debt downgraded to junk after April 7 as collateral when lending to banks, and that date could mark a cut-off point if it decides to add junk-rated debt to its Corporate Sector Purchase Programme.
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Even going back to mid-March, when coronavirus lockdowns began, would add only two issuers, German car-parts maker ZF Friedrichshafen and Italian retailer Esselunga.
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“This measure (buying “fallen angel” debt) would be very controversial and only affect a few names to date, which are all protected by the collateral backstop, so I don\\\’t expect it will be introduced,” said Marco Brancolini, a strategist at Nomura.
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The ECB does not have to sell downgraded debt it already owns but cannot buy new bonds from issuers that do not have at least one investment-grade rating from S&P Global, Moody\\\’s, Fitch or DBRS.
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Adding up all the bonds downgraded since March 22 gives total debt outstanding of 9.275 billion euros ($10.45 billion) — less than 5% of the 212 billion euros\\\’ worth of corporate bonds held by the ECB.
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The Fed is already buying junk bonds, with a backstop from the U.S. Treasury which would bear the first losses.
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Isabel Schnabel, the ECB board member in charge of the asset purchase programme, has said that mechanism would be difficult to replicate in the 19-country euro zone.
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Downgrades could come with a delay and in waves, as happened after the global financial crisis that began in 2007. If that pattern is repeated, the ECB estimates a nominal 110 billion euros of bonds could be downgraded to junk over the next year.
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Some, however, see rating agencies as more cautious this time around.
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“Only Fitch has been aggressive so far, but it now seems to have slightly softened its reaction function while Moody\\\’s, S&P and DBRS have taken a decidedly wait-and-see approach,” Nomura\\\’s Brancolini said.
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(Reporting by Francesco Canepa; Editing by Catherine Evans)
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